Answer:
C) .07
Explanation:
Current cost of newspaper = C
= $0.40 / units
Current price of newspaper = P
= $0.80 / UNIT
Current salvage value = S = 0
Cost of under ordering = Cu
= P – C
= $40
Cost of over ordering = C – S
= $0.40
Critical ratio = Cu/ ( Cu + Co )
= 0.4 / ( 0.4 + 0.4)
= 0.5
Since critical ratio defines the probability of optimum demand ,
We can consider service level ( %) = Critical ratio x 100
Current service level = 50 %
When the salvage value = $0.1 ,
Cost of under ordering = Cu
= P – C
= $40
Cost of over ordering = C – S
= $0.40 - $0.1
= $0.30
Critical ratio = Cu/ ( Cu + Co )
= 0.4 / ( 0.4 + 0.3)
= 0.4/0. 7
= 0.5714
The revised service level = 0.5714 x 100 = 57.14 %
Therefore, The increase in service level is 0.07.
